Bellevue & Seattle, WA Tax, Accounting, QuickBooks, Business Consulting: Stephen L. Nelson, CPA

Accounting Terms-C

call
A demand for payment of a loan. A lender can make a call if the borrower has failed to make timely payments or has breached a contractual agreement regarding the loan.

call option
An option to purchase shares of a stock at a specific price in a certain time period. Brokers exercise a call option if the price of the stock rises above the option price during the option period.

callable bonds
Bonds that issuers can pay off before the maturity date is reached.

calls and puts
Options to sell or buy stock shares at a certain price within a certain time. The holder of a put can require a buyer to buy an option, within the agreed-upon time period, at the specified price. The holder of a call can demand that a seller sell an option, within the agreed-upon time period, at the agreed-upon price. Investors buy put and call options as a hedge against large declines or rises in stock prices.

canceled check
A check that has been endorsed by a payee and paid by the bank from which it was drawn.

capital
All items of value owned by an individual or corporation, including cash, inventory, and property.

capital gain (or loss)
The difference between the purchase price of a capital asset and the resale price. If the resale price is higher than the purchase price, a capital gain results. If the resale price is lower than the purchase price, that represents a capital loss. Capital gains of individuals are subject to favorable tax treatment.

capital lease
For accounting purposes, a lease that is treated as an owned asset. Equipment is often leased to companies on a capital basis. The company leasing the asset enjoys the tax benefits of ownership, including deductions for maintenance expenses. When the lease expires, the company leasing the asset is usually allowed to purchase it.

capital market
A general term referring to stock markets and bond markets where governments and corporations can sell securities, stocks, and bonds in order to raise capital.

cash
Money that can be used for financial transactions, including funds held in checking accounts.

cash basis
An accounting method in which income and expenses are recorded when money actually changes hands. Cash basis accounting is generally easier to do—and often produces tax benefits.

cash dividend
Stock dividends paid in cash, not in shares of stock.

certificate of deposit (CD)
A bank deposit that pays a fixed rate of interest over a stated period of time. Most CDs cannot be redeemed until a maturity date is reached.

certified public accountant (CPA)
A person who has been licensed by the state to issue opinions about the accuracy and fairness of a business’s financial reports. CPAs also typically provide tax planning and preparation services for businesses and individuals.

charitable contribution
A contribution to a charity that can be deducted for income tax purposes.

charitable gift annuity
An annuity purchased from a charitable organization for more than the annuity’s market value. The amount paid over and above the market value is considered a charitable donation.

check
A written order instructing a bank to pay a sum to a third party.

check kiting
An illegal scheme for fraudulently inflating the account balance of checking accounts. For example, a man with two checking accounts, one in Bank A and one in Bank B, writes a check on account A for $5,000 to his Bank B account. He deposits the check in Bank B. Until the check clears, he has $5,000 in both Bank B and Bank A. Next, he writes a check on account B for $5,000 to his Bank A account. He deposits this check, too. Until the checks clear, he has $10,000 in his Bank A account and $5,000 in his Bank B account. On paper he has $15,000; actually; he has only $5,000.

Clifford trust
A trust established for ten or more years whereby assets are transferred from one individual to another and then back again when the ten or more year period is over. Before laws governing Clifford trusts were changed in 1986, they were often used to transfer assets, such as college funds, to children, who are taxed at a lower tax rate than adults. After the ten-or-more-year period, the adult could reclaim the trust.

closing price
The final price of a stock or commodity at the time the exchange closes for the day.

cloud on title
A title that cannot be transferred to someone else because liens, court judgments, or other impediments prevent the owner from selling it.

co-insurance
A percentage amount for which an insurance policyholder must be covered. For example, if a fire insurance policy has a 70 percent co-insurance clause, the insured must be covered for at least 70 percent of the value of his or her home.

collar
A device that protects the lender and the borrower from fluctuations in interest rates. The collar consists of the floor, which is the lowest the interest rate on the loan can go, and the cap, which is the highest interest rate that the bank can charge the borrower.

collateral
As part of a loan agreement, the property or securities that the borrower pledges to the lender in case the borrower cannot pay back the loan.

collateral loan
A loan given on the strength of the borrower’s collateral, as opposed to the borrower’s good standing in the community or good character.

commercial bank
A full-service bank owned by stockholders that makes loans, accepts deposits, and offers other commercial financial services.

commercial paper
Promissory notes, such as checks, drafts, and IOUs, that constitute a debt of some kind. Commercial paper is negotiable and can be traded.

commodity exchange
A marketplace where dealers and traders can meet to buy and sell goods.

common law
The body of law developed in England, based on precedents and custom, that forms the basis for the legal system in all states except Louisiana, where Napoleonic law is practiced.

common stock
Securities that represent ownership in a corporation. By law, holders of common stock can receive dividends only after claims by preferred stockholders, creditors, and bondholders have been satisfied. Common stockholders are the last to be paid if a corporation goes bankrupt.

compensating balance
A minimum balance that borrowers who wish to secure a loan from a bank must keep on deposit with the bank.

compound interest
Interest calculated on the original principal of a deposit plus all accrued interest.

conservator
A person appointed by a court to manage the affairs of an estate or the affairs of a person deemed incompetent.

consignment
An arrangement in which the manufacturer or person who made the goods is paid only after the goods are sold (referred to as sold on consignment).

construction loan
A loan covering construction costs, paid out at intervals as the construction project is completed. Also called a construction mortgage.

constructive notice
A notice published in a newspaper announcing some action, such as a lien or the confiscation of property by the state. By law, some actions must be “given constructive notice” so that anyone objecting can take action.

contract
A legally binding agreement between two or more parties, where the responsibilities of each are clearly outlined.

conventional mortgage
A mortgage not backed by the Federal Housing Administration (FHA).

Convertible currency
Currency that is easy to exchange for the currency of another nation. Countries whose currency is not convertible set restrictions on how their currency can be traded.

co-payment
In a health insurance plan, a percentage of a medical bill that you pay (the insurer covers the rest). Typically, you co-pay bills until you reach a certain dollar limit. After that point, the insurer pays 100 percent of your medical bills.

corpus
Latin for body. The corpus is the principal of a fund or estate, as distinguished from the interest or other income it generates.

co-signer
A joint signer of a promissory note. Co-signers are jointly responsible for paying back loans.

countersign
A signature that asserts the authenticity of a document already signed by another. In most companies, large checks require a countersign. Also called countersignature.

country risk
The risk that an economic or political upheaval in a country will deplete its foreign reserves and prevent the country from paying back international loans.

coupon
A certificate attached to a bond stating how much interest is due. When the coupon is presented, the interest payment is made.

coupon bond
Bond with a coupon attached that states when interest payments are due and how much the payments are.

covenant
A written agreement between parties that has been sealed from public disclosure.

credit
Money a bank or other lending institution places at your disposal when you agree to pay it back at a later date. Also, the portion of a bookkeeping entry that appears on the right side of a ledger (as discussed in Chapter 2 of Book 1).

credit agency
An agency that obtains data about the credit history of individuals and companies and offers the data to creditors and others.

credit insurance
Insurance purchased by banks as a defense against large credit losses.

credit limit
The most that a consumer or company can borrow at one time from a bank or other creditor.

credit line
A prearranged agreement whereby a lender will extend to an individual or company. You typically pay an annual fee for a credit line even if you don’t use the credit line.

credit rating
A lender’s appraisal of a borrower’s ability to pay back loans. Credit ratings are based primarily on the borrower’s past history of paying back loans.

credit risk
The risk that a borrower will not be able to pay back a loan.

creditor
A bank or other agency that extends credit to borrowers. The opposite of a creditor is a debtor.

cross-collateral
Collateral that backs up several loans, not just one, as arranged by agreement with the lender.

currency
Paper money in circulation. Also refers to the paper money issued by a nation. The dollar is the currency of the United States.

currency basket
Currency unit composed of currency from different nations. International transactions are sometimes made in basket currency to protect against one currency being devalued. For example, a payment made in U.S. dollars as well as Japanese yen retains more of its value if the yen or dollar happens to fall in value.

currency swap
An agreement between companies to exchange equivalent amounts of one type of currency for another. Companies engage in currency swaps, for example, to diversify their portfolios. At the end of the agreement, the currencies are swapped back.

currency translation
Changing balance sheet entries and totals from one currency to another. Multinational corporations perform currency translations on their balance sheets as a way of measuring financial performance. Some countries require corporations to do currency translations when reporting their income.

current assets
Assets that either are equivalent to cash or can easily and readily be converted into cash, including cash, money market funds, accounts receivable, inventory, and short-term investments.

current yield
The annual interest rate paid by a bond or other security, expressed as a percentage of the principal.

cushion
The time between the date a bond is issued and its first call date; that is, the day it can be redeemed either in whole or in part.

custodian
An institution or a broker that oversees the management of a group of assets.

custody account
A bank account held in trust by a parent or guardian on behalf of a minor.

cycle billing
Billing one set of customers from a customer list on specific days of the month. For example, customers whose last names begin with A would be billed on the first of the month, B on the second day, and so on. The idea is to spread out the paperwork over a month and keep bill payments coming in regularly.

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